Shadow Pricing, Highway Robbery, and the Price of Drugs

The controversy over higher prices for older drugs.

It's often difficult to pinpoint the moment a revolution starts, but when it comes to the issue of drug pricing, it's quite possible that we'll look back at Dec. 6, 2013, as the day that everything changed.

That was the day that Gilead's Sovaldi was approved for sale by the FDA. Sovaldi's launch -- and its $84,000 price tag -- set off a tsunami of media attention on the issue of medication costs. Never mind that Sovaldi has an incredible cure rate, all of the attention fell squarely on it's $84,000 price tag.

"On Feb. 10, Valeant Pharmaceuticals International Inc. bought the rights to a pair of life-saving heart drugs. The same day, their list prices rose by 525% and 212%.

Neither of the drugs, Nitropress or Isuprel, was improved as a result of costly investment in lab work and human testing, Valeant said. Nor was manufacture of the medicines shifted to an expensive new plant. The big change: the drugs' ownership."

"On May 30 last year, the price for a vial of the blockbuster diabetes medication Lantus went up by 16.1 percent. On the next day, Lantus's direct competitor, Levemir, also registered a price increase -- of 16.1 percent."

The pattern repeated itself six months later when Lantus, from French drugmaker Sanofi, was marked up 11.9 percent, and Levemir, made by Novo Nordisk A/S, matched again exactly.

In 13 instances since 2009, prices of Lantus and Levemir -- which dominate the global market for long-acting injectable insulin with $11 billion in combined sales -- have gone up in tandem in the U.S., according to SSR Health, a market researcher in Montclair, New Jersey."

In the Wall Street Journal article, Erin Fox, the director of drug information services at University of Utah Health Care, says that this all seems like "highway robbery." The Bloomberg article calls the price-matching policy "shadow pricing" and multiple reputable sources arrive at the conclusion that this supposedly competitive market is anything but.

So, what does all this coverage indicate?

Many years ago, back before I got into the healthcare analytics space, I was an investment banker and subject to the rules and regulations laid down by the SEC and FINRA. In that business, we had to be aware of potential client red flags like market manipulation and insider trading. Maybe it's the training that's kicking in here, but when I see stories like those strung together above I can't help but feel like someone's getting one over on someone else. And while I'm a tried and true capitalist who believes in letting market demand dictate pricing, it's evident that this pharma pricing strategy may have pushed too far.

This constant media drumbeat is revealing a system that is cracking at the seams, as healthcare decision makers -- doctors, pharmacists, hospitals, health systems, and insurers become more vocal in expressing increasing anger and incredulity at every newly announced price increase or launch price. And we're starting to see this questioning lead to a demand for pricing justification.

What many healthcare professionals have come to realize is that these high prices actually have little to no bearing on the safety, efficacy, or comparative effectiveness of the drug. The upfront drug costs criticized in these articles definitely don't take into account the total cost of a drug (the true cost of prescribing one drug over another, taking into consideration side effects and their ripple effects). For example, look at the differences in total downstream medical costs in the case of Eylea versus Lucentis in the highly competitive wet-AMD market that we analyzed recently.

Talking as a whole, the media coverage on drug pricing is revealing how the system is starting to push back. Companies like Express Scripts are putting their foot down on basic drug pricing and are demanding more information and data regarding the overall cost and safety of drugs. But we also see an emerging trend among payer and provider clients that are now realizing the huge impact that the shadow costs from drug side effects have on their bottom line and patient outcomes, and they too are demanding more transparency in financial and safety drug data in order to make more effective and accurate drug purchasing decisions.

We expect the national debate around drug pricing to intensify and morph to include evaluating drug pricing based on their "fully loaded" costs. After all, it's we as taxpayers who foot the bill for the bulk of these expenses through the Medicare and Medicaid systems. And we as patients who suffer because we simply can't afford needed medications anymore.

Wouldn't it be nice to know if the high price is really worth it?

Brian Overstreet is co-founder and president of AdverseEvents, a California-based healthcare informatics company that improves patient safety and reduces systemic healthcare costs through the comprehensive analysis of postmarketing drug side effect data. This post originally appeared on the company's RxView blog.

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